The bounce back from the Great Recession, which ended in June 2009, has been notably weaker than typical post-recession recovery periods. The economy appeared to be picking up steam in 2013 and 2014. The first half of 2016 was disappointingly slow, but signs of improvement for the second half have appeared.
Employment continues to grow at a slow, but steady, pace. The overall outlook is for continued, albeit slow, expansion in the economy and the construction industry.
Starting in 2012, the construction sector has turned in stronger growth than the general economy. However, that growth has not been evenly distributed. Residential construction has had the strongest rebound, but with notable differences. Multifamily construction has fully recovered, while single-family construction struggles with starts still well below the long-term needs of the nation.
Meanwhile, nonresidential building construction has done fairly well. But again, there are differences within this category. For lease properties (lodging, office and retail) generally have shown solid growth. Institutional construction faltered, only showing some minimal growth in 2015. Going forward, for-lease construction will grow, but at a much slower pace. Office construction is likely to be the best performer in this category, mainly benefiting large and medium urban areas. Institutional construction activity will advance, mainly due to more health care construction activity and a slight pickup in education construction activity. Urban areas across the United States will benefit from this activity the most.
From 2012 through 2015, manufacturing construction had healthy growth. Most of that strength derived from energy-related investment in chemical plants due to the sharp increase in U.S. energy production. With the reductions in production due to lower prices, construction in energy-related investment slowed considerably in late 2015 and into 2016. In 2017, manufacturing construction will improve slightly. The South and Midwest will be the primary beneficiaries of this construction activity, while the Northeast and West will benefit from high-tech manufacturing construction.
Infrastructure and Energy
Nonresidential, non-building construction (infrastructure) has only had two good post-recession years: 2012 and 2014. Construction on power projects was the prime source of growth in those years, with a minor assist from transportation projects. In 2017, construction activity for this area is likely to be flat. Even if politicians deliver on their promises of increased infrastructure spending, most of it will occur in 2018 and beyond.
Several states have stepped into the breach, many experimenting with new sources of funding, such as public-private partnerships (P3s). Look for P3 projects to support infrastructure projects in 2017 and beyond.
The economy has adjusted to lower energy prices. Some of the positives from the drop in prices are still filtering through the economy. Meanwhile, most of the negatives have played out. Energy companies have adapted remarkably well to the lower price environment. As a result, production has held up better than expected. The current price structure is likely to continue for at least another year and possibly longer barring a major supply disruption. Relatively “minor” disruptions like the Colonial Pipeline leak that resulted in a temporary shutdown will lead to price spikes—in this case for gasoline on the East Coast.
The boom in the energy sector gave a boost to states such as Montana, North Dakota, Pennsylvania, Texas and Wyoming. This spilled over to the construction sector in those states. The turnaround in the energy sector has been a drag on construction, putting downward pressure on construction employment in Montana, North Dakota and Wyoming. Nonetheless, construction employment makes up a relatively large share of total non-farm employment in those states. Construction activity in those states will continue at a slow pace in 2017.
With its dependence on coal, West Virginia has been hard hit by lower natural gas prices (a direct competitor to coal for use in power plants) and environmental regulations. Montana had the double whammy of a hit on its coal industry and its oil and gas industry. Given their more diverse economies, employment in the construction industry in Pennsylvania and Texas grew (0.3 percent and 1.5 percent, respectively, as of August 2016) in spite of the downturn in the energy sector.
Pennsylvania will experience some improvement, mainly concentrated in its urban areas and largely due to construction for office and health care. Texas will continue to benefit from its diverse economy, with Dallas showing the most growth. Despite the hit from the slowdown in the energy sector, Houston is doing relatively well and can expect slow growth.
Health Care, Lodging, Manufacturing and Residential
Construction activity in the Gulf Coast states of Alabama, Louisiana and Mississippi will be concentrated in manufacturing and residential construction. Much of Louisiana’s construction resources will be devoted to rebuilding following the recent devastating floods.
The same will be true for many southern Atlantic coastal areas. Overall, the southern states will experience healthy residential construction activity. Manufacturing construction will be important to much of the area. The urban areas will benefit from office and some retail construction.
Lower energy prices have helped, and will continue to help, states as diverse as Indiana, Kansas, Michigan, New Hampshire, New York, Pennsylvania and Tennessee. They also will benefit from manufacturing and health care construction.
Investment in lodging will continue in locations that thrive on business and leisure travel. These include large cities such as Atlanta, Chicago, Las Vegas, Los Angeles, Miami, San Francisco and Seattle. Even as investment in lodging proceeds at a slower pace in 2017, lodging construction activity will spread out to smaller resort areas.
Most areas of the country will see further increases in residential construction as employment continues to rise, spurring household formation and demand for single-family and multifamily units. Most of the larger multifamily projects will be in major metro areas such as Boston, Los Angeles, Miami, New York City, Philadelphia, San Francisco and Washington, D.C., but also will begin to expand to some urban areas in the next tier—mainly in the South and West.
Multifamily construction activity has slowed in some of these areas, notably New York City, Philadelphia, San Francisco and Washington, D.C., as new products have come onto the market—slowing or stabilizing rent increases. As the new product is absorbed and vacancy rates fall, construction will rebound in the second half of 2017.
Bernard M. Markstein is president and chief economist of Markstein Advisors, and a contributing economist for Associated Builders and Contractors. For more information, email firstname.lastname@example.org.